Capped Option

A capped option is a type of option with a “cap” on the profits. In other words, you can only make as much as the cap for capped options.

When the underlying asset of the option closes above the cap ceiling price for call options (or below the floor price for put options), the option automatically exercises, unlike your typical run-of-the-mill options.

While this takes some of the fun out of the potential profits you could make from options, it does provide some security at a cheaper price. Capped options are usually used when investors think the underlying asset is going to move more like a tortoise than a hare, so the cap is more of a failsafe than an active feature of the option.

If you’re into that tortoise life and are interested in options trading, looking at capped options might be a good place to start.